Bring the Madoff story up to date with events that occurred after the case book went to print. Discuss your thoughts on Madoff’s auditor and the lack of awareness any regulators had that such a large company was audited by a sole-practitioner firm. Why did that happen? Could it happen again? Consider that Madoff was a “service provider” to various companies that outsourced investment activities to Madoff. If the auditors of “feeder firms” had adequately investigated Madoff as a third-party service provider (formerly covered under SAS 70, now under the attest standards), would the Madoff fraud have been uncovered?

Misinformation: For example, in December 2008, UBP (Union Bancaire Privée) stated: “Madoff’s auditors Friehling & Horowitz were accredited by the SEC and all the investment vehicles were audited by the largest auditing firms. Despite the supposed size weakness of Madoff’s auditors, the SEC has each year renewed its approval; SEC reports on the firm were regularly made available” (UBP, 2008).

vii. Lack of competence at the SEC (didn’t pay attention to the warnings by Harry Markopolos, who said that the SEC employees didn’t understand the Ponzi scheme after he explained it to them; one writer said that too many attorneys and not enough accountants/fraud examiners had been hired).

1. Markopolos, a CFE, first heard of Madoff in 1999, when his boss, Ron Egalka, who operated a brokerage firm and who loved mathand logic was frustrated that a strategy that he had pioneered, the split-strike conversion was being used to greater advantage by Madoff. Egalka asked Markopolos to replicate Madoff’s returns.

2. Markopolos became suspicious when he couldn’t replicate; his model lagged the market whereas Madoff’s model did well under any market conditions. Madoff’s results weren’t outstanding in terms of size of returns -- they were consistently positive, even in a “down” economy.

3. Markopolos and colleagues, Frank Casey and Neil Chelo, also checked around and found—as had others—that no one had traded S & P options with Madoff.

viii. Lack of authority and competence at FINRA (Financial Industry Regulatory Authority)

1. FINRA had the authority to examine and discipline securities firms and brokers, but not investment advisory firms. (FINRA still does not regulate investment adviser firms because all registered investment adviser firms are currently regulated either by the SEC or relevant states. It has expressed an interest to become a self-regulatory organization for registered investment advisory firms but in 2014 backed off from relating these firms. FINRA does administer the online application and filing system for the registration of investment advisory firms and individual investment adviser representatives.)

2. Apparently, it missed or overlooked red flags when conducting yearly inspections of the brokerage operations of Madoff.

ix. PCAOB lack of authority

1. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended SOX to require auditors of all broker-dealers to register with the PCAOB and gave the PCAOB the power to inspect these auditors. Previously, public broker-dealers were required to be audited by PCAOB-registered auditors but the PCAOB did not have the authority to regulate or inspect auditors of non-public broker-dealers.

2. This expanded oversight is to be funded by assessing and collecting an annual accounting “support” fee from brokers and dealers.

III. The Players

a. Madoff employees:

i. Frank DiPascali

1. Received at least $3 M in annual salary and bonuses at the end of the fraud (not bad for a high-school education, eh?)

2. Lived in a home on 7 acres, valued at $1.38 M

3. Wife worked for JP Morgan Chase’s mortgage unit

4. Together they owned (in 2009)

a. 2 black Mercedes,

b. 2009 Audi S5 Quattro

c. 61-foot yacht bought for $1.9 M ($1.7M from investor’s money), and which required a full-time captain

5. Had four children (called “secondary victims” in psychology)

6. His attorney said of him, “He stepped out of that universe and into the real kind of world. He is now in a universe with laws and regulations and oaths and promises and truths.”

7. In August 2009, he was charged with conspiracy, securities fraud, investment advisor fraud, falsifying records of a broker-dealer, falsifying records of an investment advisor, mail fraud, wire fraud, international money laundering, perjury, and attempting to evade federal income taxes. He pled guilty to all counts. He has agreed to pay $504,459.76 towards a criminal penalty of $170.25 billion (Stipulation and Order, 2010). He was freed on $10 million bails in June 2010. He could face up to 125 years in prison. As of March 2012, he had not been sentenced (Glovin and Voris, 2012).